Everything You Need to Know About Foreclosures
How to Repair Your Credit After Foreclosure
May 19, 2020
Foreclosure: a word every homeowner dreads hearing. Whether you’re just starting to miss mortgage payments or you’ve already started getting notices from your lender, facing the possibility of foreclosure can cause major panic. Educating yourself about how foreclosures work can help you deal with having it happen to you or a loved one, or even prevent it in the first place.
What is foreclosure?
Foreclosure is what happens when a homeowner defaults, or misses multiple payments, on their mortgage. After a certain number of missed payments, the lender repossesses their house and tries to sell it off to recover the difference. A home can also be foreclosed if a homeowner doesn’t pay their property taxes or HOA fees. Lenders can do this because when a homeowner signs a mortgage, they are taking out a loan, using the house as collateral. If the loan isn’t being paid, the lender takes possession of the house in order to recoup from the money they lost from the missed payments.
Why do foreclosures happen?
No one buys a house expecting to experience foreclosure, but there are certain situations that are more likely to result in it happening. Unexpected life events can take a major toll on a homeowner’s finances, and may result in them being unable to make their monthly payments. Getting fired or laid off, having a medical emergency, going through a divorce, or experiencing a death in the family are all examples of circumstances that can disrupt someone’s life considerably and cause significant financial strain.
Increased mortgage payments can also make foreclosure more likely to happen. Homeowners on adjustable rate mortgages may experience an increased interest rate, resulting in higher monthly payments. Another reason could be a rise in property taxes or insurance premiums, resulting in an escrow shortage. This can cause both escrow payments and monthly mortgage payments to increase, since property taxes and homeowners insurance are often paid through those.
Homeowners may also occasionally choose to allow their home to go into foreclosure if their home is underwater. When this happens, the amount owed on the mortgage is higher than the value of the home. The homeowner may simply stop paying their mortgage on purpose, leaving the house to be the lender’s problem.
What is the foreclosure process?
The foreclosure process may vary depending on what state you live in, whether it’s judicial or non-judicial, and your individual circumstances, but for the most part, here’s what you can expect.
Missed payments
When a homeowner begins missing payments on their mortgage, they become at risk for being foreclosed on. However, the foreclosure process does not usually begin until at least three missed payments, or after approximately 90 days. This is because the process is expensive for lenders and they want to avoid it if possible, so after one or two missed payments, they typically reach out to the homeowner by letter or phone to discuss why they haven’t paid yet. The lender will likely be willing to work with them to find other solutions, such as foreclosure mediation, HUD-certified financial counseling, or programs for loan modifications.
Notice of Default
Once the homeowner has missed payments for three to six months, the lender will record a public notice with the County Recorder’s Office and send an official letter to them. This is the notice of default, also known as a lis pendens in some states, which warns the homeowner that legal action will be taken if the debt isn’t paid. At this point the home is considered in pre-foreclosure, and they usually have another 90 to 120 days to figure out a way to settle payments.
Notice of Sale
If the homeowner has still been unable to pay the debt, the lender will post a notice of sale stating the date of the auction, or trustee sale. A copy of this is sent to the homeowner and recorded with the County Recorder’s Office, and it’s also usually posted in a local paper for three weeks leading up to the auction. At this point, the homeowner may still prevent the auction from happening if they can pay off their debt to the lender.
Auction
At this point the house will be sold to the highest bidder in an auction, also known as a trustee’s sale. The auction may take place on the steps of the county courthouse, at a convention center, at the property itself, or even online. The starting bid is usually equal to the balance owed on the loan, and the buyer must pay either the full amount or a large portion of it in cash immediately. If no one else buys the home, ownership will go to the lender, and becomes an REO (real estate owned property). They will then try to sell the house through a broker or with assistance from an REO asset manager.
Eviction
After the house has sold through public auction or been transferred to the lender, the former homeowner will receive an eviction notice and be required to vacate the premises. They may be given several days to move out, or they may have to leave immediately. Sometimes the lender may offer relocation assistance, or “cash for keys”, which can help with finding new accomodations.
Redemption
Many states offer a redemption period after the house has been sold at auction. This usually requires the homeowner to pay the owed balance on the loan in addition to any costs associated with the foreclosure process. Whether the foreclosure was judicial or non-judicial may also factor into whether this is an option. If your state allows for right of redemption, you’ll typically be informed about this on either the notice of default or the notice of sale. The allowed time frame varies by state, but may last up to a year after the sale takes place.
What are the consequences of foreclosure?
Unfortunately, foreclosure causes even more problems than just being forced out of your home. The eviction itself and everything leading up to it can be an incredibly stressful time. Foreclosures also cause massive damage to credit scores. It stays on your credit report for seven years, and can make it extremely difficult to acquire other loans. Besides all this, foreclosures themselves can be expensive, as the lender may charge late fees once payments stop coming in. Trying to fight the foreclosure in court might incur legal fees as well.
How do you prevent foreclosure?
Foreclosing on a house is an expensive, time-consuming process – not only for the homeowner, but for the lender as well. Because of this, they’re often willing to help homeowners find solutions to continue making payments and keep their house. Stay in communication with your lender and inform them if you’ve hit a rough patch. They may be able to offer assistance by modifying your loan to make it more affordable, or working out a payment plan while you get back on your feet. There are also government programs that can help homeowners avoid foreclosure. Filing bankruptcy may also be an option to prevent the foreclosure, but whether this will be an option will depend on your individual situation, so speak with an attorney if you’re considering this.
If you’re running out of options and want to avoid the major hit to your credit, there are other ways you can halt the foreclosure process, even if they still result in the eventual loss of your home. Your lender may agree to a short sale, in which the home is sold by the homeowner to pay off the remaining loan balance. If this isn’t an option, a lender may agree to a deed in lieu of foreclosure. This involves signing the deed over to the lender while also relieving the homeowner of their housing debt.
As you’re dealing with this difficult time, also be cautious of scammers who target people struggling with foreclosure. They may pose as lending companies or credit counselors, and end up causing you even more problems. You can start looking for an HUD-approved housing counselor by calling HUD toll free at (800) 569-4287, or calling the Homeowner’s Help Hotline at (888) 995-HOPE. Foreclosure may seem like the end of the world, but there are plenty of resources available to help you during this difficult time.
